Even if you have been rejected for a jumbo Kansas City home loan, you can still apply for a second loan, or a “piggyback” loan. A piggyback loan is when two mortgages are opened at the same time, one piggybacking on the other.
Piggyback loans are not for everyone. If you are considering a second mortgage in KC, there are several pros and cons that you must take into account before applying. In some cases, it may not benefit you at all while in others it may be a great opportunity.
Let’s start with the good news. Piggyback mortgages in KC can help you:
- Avoid paying private mortgage insurance (PMI)
- Pay fewer taxes (second mortgages are tax deductible)
- Avoid going over the conforming loan limit
Pro: Avoid Paying PMI
Usually, making a low down payment (under 20%) sticks you between a rock and a hard place. Not only would you be required to get private mortgage insurance, but your mortgage rates would be higher. However, you can avoid PMI by using up to 10% of the home’s value for a second mortgage. The most common piggyback loan-to-value ratio is the 80-10-10. Each number respectively refers to:
- 80% of the home is financed by your first mortgage
- 10% of the home is financed by the second mortgage (typically from a different lender than your first mortgage)
- 10% is financed by your down payment
Therefore, if you are only able to afford to put down 10% on your home, financing will still be available to you through a piggyback mortgage in KC. Lenders will also be able to sell the first mortgage to buyers like Freddie Mac and Fannie Mae since the first mortgage was made at an 80 percent loan-to-value ratio.
Con: You Can’t Cancel a Piggyback Mortgage
While piggyback mortgages in KC prevent you from having to pay PMI, you will not be able to cancel the second mortgage. People who pay PMI can eventually remove it from their mortgage after they gain a certain amount of home equity, but people who make payments on piggyback mortgages must do so until the loan is paid off. If you believe you can accrue 20-25% home equity in your home in the first few years, you may want to reconsider investing in a piggyback mortgage and choosing PMI instead.
Pro: Piggyback Mortgages are Tax Deductible
Piggyback mortgages are just as tax deductible as the first mortgage. This method is a great way to lower your taxable income. With the greater financial responsibility that comes with owning a house, tax deductions are an incentive for prospective homeowners.
Con: Refinancing Is More Difficult
Refinancing your home loan is a great way to lower your mortgage rate and save money. However, when you have two mortgages on your home already, it is more difficult to qualify for refinancing. Before you can even begin, your lender for the piggyback mortgage must agree to be subordinate to the refinanced loan. Some lenders may not agree to this if they want to be paid off first.
Pro: Avoid the Conforming Loan Limit
Going over the conforming loan limit (i.e. by purchasing a jumbo loan) is a higher risk to lenders, as non-conforming loans are not guaranteed by government sponsored organizations. By lowering your risk to lenders, you are more likely to qualify for mortgages in KC.